We regard USD/CAD as a low-beta version of USD/NOK and maintain a bullish view on USD/CAD on a 3-12M horizon. That said, in the near-term risks are for a further setback to the broad USD given weakness in US figures and as markets price in the first rate cut for March. This is likely to benefit CAD albeit not by as much as other cyclically sensitive currencies.

We expect the Bank of Canada to keep policy rates unchanged until Q1 2024 where we pencil in the first rate cut. We generally regard relative rates as neutral for USD/CAD but note how CFTC IMM positioning indicators suggest that markets remain long USD/CAD which on balance limits the topside. 

A persistent move lower in the cross would likely require a stronger global growth backdrop than what we pencil in or a very ‘hard landing’ requiring a sharp easing of global monetary conditions, including a weaker USD.